Economics of Best Buy

One of the fortune 500 companies in our society is Best Buy. Best Buy is one of the largest consumer electronics retailer company in the United States and Canada. There are many products Best Buy distributes, such as; computers, computer equipment, video and audio products, refrigerators, coffeemakers, compact discs, video games, DVD and VHS movies and players, CD’s, computer software, cameras, cell phones, and satellite systems and so on. In addition, their customer service is very helpful and has improved throughout the years.
The Geek Squad is one of their forms of customer service they provide and they offer various computer-related services and accessories for residential and commercial clients. Best Buy didn’t always have these products and services available. They are an industry that changes with the times. They supply products that are in high demand by the consumers. Best Buy was started in 1996 by Richard R. Schulze and his business partner James Wheeler. It was originally known as Sound of Music and the first store was located in St. Paul, Minnesota.
In 1983, the company’s name was changed to Best Buy and the first store named Best Buy was located in Burnsville, Minnesota. By 1984, there were only 8 Best Buy’s in the Midwest, but by 1987 the number tripled and their sales and earnings were at a high $239 million and $7. 7 million respectively. And since they have money to spend, they increased their warehouse size and products. In 1985, Best Buy went public and then two years later they were listed on the New York Stock Exchange. By 1988, sales had doubled to $439 million, but net earning declined 64%.

Despite the net earnings declining, revenues were still increasing well into 1989. Also, in 1989, Best Buy launched its Concept II stores with bigger show rooms, fewer sales people and more self help product information. From 1992-1993 Best Buy had the best financial performance in the company’s 27 year history with an increase in revenues and earnings. Following this, 38 new stores were opened up. By 1997, Best Buy became the industry leader. This caused net profits to jump to $94. 5 million and revenues to jump to $8. 36 billion and for their stock to increase to $36 per share.
In 1998, Best Buy created an online music store and in 2000 they expanded it and it offered more then music, it offers DVDs, consumer electronics, computers, software’s and games. Having a website made Best Buy’s income grow even more. By 2001, profits increased 14%, revenues rose to $15. 33 billion. Despite the recession in 2001, Best Buy bounced back the following year with $570 million in profits and $19. 6 billion in revenue. And by 2004, revenue reached $25 billion and net income rose to $705 million. Best Buy is a publicly traded corporation.
A publicly traded corporation is the style of many companies in the United States, Europe and India. They are liable, taxable, have legal rights that an individual citizen would have, they can sue and be sued and must establish a paperwork identity with state and/or federal governments as required by local laws. When it comes to liability, public corporations have limited liability which means a partner or investor cannot lose more than the amount invested and the investor or partner is not personally responsible for the debts and obligations of the company in the event of bankruptcy.
For taxes public corporations are taxed twice; once for revenue for the corporation and once for personal income for the shareholders. Best Buy is the type of company that always stays up to date with the latest technologies which keeps the consumers coming back and interested. They also have every product on the floor when you walk in so the choices of products are endless and you never have to wonder if there is more. In addition, they base their stores on low pricing and efficiency in operation; this explains why Best Buy’s industry has grown so much since 1966.
Mostly every corporation deals with competitors. The biggest competition Best Buy faced was Circuit City. They were competitors because they were the top two retail chains for electronics. Eventually Best Buy took over and put Circuit City out of business. Why? The answer is because Best Buy does a better job of utilizing marketing through brand recognition, incentives and customer service. Best Buy has gotten a lot better at putting the customers first and helping them in any way they can and Circuit City has had many problems with keeping their customers satisfied.
Also, Circuit City’s problem is they aren’t competitive; they keep losing money quarter after quarter. Even their stock dropped from $22 to $3. 83. Why is Circuit City losing money? It’s because they aren’t updated enough with the latest technologies like Best Buy is. Also, whatever Circuit City has Best Buy already has and better so people want to go to Best Buy for that reason. In addition, Best Buy offers services such as computer service and support and home theater installation, which makes Best Buy different from Circuit City and other fortune 500 companies.
Before Circuit City went out of business, there have been reports about how Best Buy would benefit from reduced competition. There was an estimation of a $12 million increase in revenue if Circuit City wasn’t in business. In addition, more suppliers will be forced to sell their products to them whether they want to or not. For example, if Best Buy demands for better terms on Sony’s big screen LCD TV’s and if Sony doesn’t like the terms they have nowhere to turn to. Every company uses and must use adverting in order to gain popularity and people’s interest.
Both Best Buy and Circuit City use advertising, but they both advertise in different ways. Best Buy’s strategy is aggressive advertising and competitive pricing and pursuit of cost saving strategy. There are three messages they portray in their TV advertisements, they are; “you can trust us to always have your best interests in mind, we have a unique take on how technology and entertainment can make your life better and you can always expect to find great prices”. For example, their commercial titled “True Stories” focused on Best Buy employees telling their true stories on how they helped customers.
As the years go on advertising becomes ignored because people don’t trust the misleading ads so, to fix this problem Best Buy recently featured their customer’s comments from online product reviews and product ratings in their nationwide Sunday newspaper circular. This helps because potential customers will most likely trust people who have already bought something from Best Buy then the Best Buy salesmen. This practice of advertising is called “Bazaarvoice” and it is very affective and it is the future of advertising.
In addition, Best Buy has advertisements that highlight key entertainment groups like MGM Studios, Activision, Sega and Rock Band which showcase the enjoyment people are acquiring from these products and this makes people want to have these items because everyone likes to have fun and enjoy themselves. The problem with Circuit City is they never did anything like Best Buy. Circuit City never changed its ways and products so they never adapted new advertising methods like the “Bazaarvoice”. In addition, since they never update their inventory onsumers were probably never interested in their ads because Circuit City’s products were outdated. Circuit City never got into selling video games and they never sold any thriving companies’ products like Apple Computers. Also, Circuit City never improved their website and the internet is used a lot now to sell products so if they are not up to speed with everyone else people will loose interest in their store. In addition, Circuit City stopped selling appliances which can stop a lot of people from buying from you.
My prediction is that Best Buy will continue to prosper in the future for many reasons. One reason I think this is because their Revenue is $20. 9 Billion. Also, their price per stock is $54. 15 (a 138% change in stock price) which is very high compared to their competitor Circuit City which is $3. 83 per stock. Best Buy’s market cap is also $18. 6 billion. In addition, there are 750 Best Buy stores throughout the United States and in Canada. As you can see, Best Buy makes a lot of money and the more money a company has the more successful they are.
So, if Best Buy keeps satisfying the customers, updates their products and basically just changes with the times then I don’t see a reason for how they will ever go out of business. Work Cited Best Buy Co. , Inc.. 2010 funding universe. 5/7/10 . “Best Buy. ” Company Profiles for Students. 1999 ed. Best Buy Launches New Holiday Advertising Campaign; Alliance with Major Entertainment Groups Highlight Customer Experience. 2002 Business Wire. 5/7/10 . Best Buy Using Reviews in Advertising. 2010 Bazaarvoice Inc. 5/13/10 . Best Buy. 2010 Mahalo. com inc. 5/7/10 .
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